Interest rates decision

The gap between the Reserve Bank's official interest rate and bank rates is the biggest it has been in 18 years. Source: AFP

THE big four banks have been put on notice to pass on any official interest rate cut today, as Opposition Leader Tony Abbott warns of "very, very forbidding international economic circumstances".

The gap between the Reserve Bank's official interest rate and bank rates is the biggest it has been in 18 years.

All indicators point to a 25-point cut when the Reserve meets today after the Australian share market lost $26 billion yesterday.

The RBA cut the cash rate from 4.25 per cent to 3.75 per cent in May and will announce its June decision at 2.30pm (AEST).

The Australian dollar rose slightly this morning, ahead of the Reserve Bank's decision.

At 12pm AEST, the dollar was trading at 97.65 US cents, up from 96.65 cents on Monday.

RBC currency strategist Michael Turner said weakness in the US dollar had supported the Australian currency's upward move.

"We've seen pretty similar action across most markets this morning," he said.

"Other currencies have been squeezing up against the US dollar."

Market concern about rate cuts by central banks around the world was also reducing investors' appetite for risk, he said.

"We have quite a lot of central bank decisions this week, and there's growing chatter that these banks might pull something out of the bag," Mr Turner said.

But GFT Forex director of currency research Kathy Lien said there was a risk the dollar would fall later today if the Reserve Bank announces the rate cut.

"The RBA is probably going to move forward with a quarter-point cut, and make it clear that they'll go further if commodity prices decline more, and if we have an intensification of Europe's sovereign debt crisis," she said.

"That's probably going to be the biggest risk for the Aussie dollar over the next 24 hours."

Shaw Stockbroking senior equities dealer Jamie Spiteri said the market had made broad-based gains in quiet trading ahead of the announcement.

At 10.10am AEST, the benchmark S&P/ASX200 index was up 49.3 points, or 1.24 per cent, at 4,034.3, while the broader All Ordinaries index was up 47.7 points, or 1.18 per cent, at 4,081.1.

On the ASX 24, the June share price index futures contract was up 45 points at 4,042, with 8,539 contracts traded.

"We're just seeing the market get re-marked upwards, highlighting the fact that it was oversold (on Monday) because of all the short-term uncertainties that exist at present," he said.

But Qantas Airways' share price plummeted more than 15 per cent this morning after the airline warned full-year profit could tumble by up to 91 per cent.

Experts have tipped the banks to pass on only about half of any cut to customers.

Consumer groups are urging disgruntled bank customers to pick up the phone and switch banks.

Treasurer Wayne Swan, who briefed Cabinet last night on market volatility, said his predicted Budget surplus gave the Reserve Bank "maximum flexibility" to cut rates, and banks were in a good position to pass on cuts.

"I don't intend to pre-empt, but this is where strong budget management really matters," he said.

"Bringing our budget back to surplus does give maximum flexibility to the Reserve Bank to cut rates if it should decide to do so."

Mining magnate Clive Palmer pre-empted a rate cut and blamed the treasurer for causing a lack of confidence in the community.

Mr Palmer, who is also mounting a political challenge to Mr Swan, said the lack of confidence was killing off economic activity.

"We'll only get that confidence back if we get rid of this government," he said in a statement.

Opposition Leader Tony Abbott said Australians were crying out for a government that restores hope, reward and opportunity.

"The last thing we need is a government with policies that will damage Australia's economic growth,'' he said.

"We will get spending down, taxes down, we will get productivity up, that means that growth will be up, and that's what Australia needs right now," he said.

NSW Premier Barry O'Farrell said he hoped the Reserve Bank was aware of conditions "out there".

"The fact is that people are doing it tough," he said.

"The fact is that the retail sector is flat, and any assistance it can get from the Reserve Bank would be welcome."

South Australian Treasurer Jack Snelling said the weaker-than-expected retail trade figures release last week and the falling residential property values meant that the time was right for a further official rate cut.

"The time is right for a further interest rate cut and I hope the Board of the Reserve Bank of Australia oblige," he said.

"I also call on financial institutions to pass on in full to customers if there is an interest rate cut announced by the Reserve Bank later today.

"The government has done what we can to boost stimulus in the housing and building industry. We need the Reserve Bank to do what it can to help that along."

Financial regulators have advised the Government the banks are well financed for the next six months and have limited exposure to the economic turmoil in Europe.

Official rates have fallen 100 points since November.

The big banks have held back a quarter of the RBA's official cuts in 12 months, denying mortgagees a $46-a-month cut in repayments.

Most economists expect the RBA to cut rates by a further 25 points today - taking rates to 3.5 per cent, the lowest level since 2009.

But analysts expect the big banks will keep about half of any cut to bolster the rates offered on deposit accounts and protect their profit levels.

Last year they made almost $24 billion in profits.

Analysis of the latest RBA data shows Australian banks have among the highest profit levels in the world and their net interest margins are back at close to pre-GFC levels.

Canstar data shows households are paying 3.29 per cent more than the cash rate for their loans, higher than during the GFC.

This comes as investors spooked by fears of a global slowdown wiped away all of this year's gains, with almost $130 billion disappearing from the value of the Australian stock market since the start of May.

Superannuation accounts are now in negative territory for the financial year as the stock market yesterday fell below 4000 points for the first time since November.

Consumer group Choice spokeswoman Ingrid Just said all RBA cuts should be passed on in full to borrowers.

"The banks are hugely profitable and, given our economic conditions, it is only fair they pass on any rate cut in full," she said.

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